The Systematic Origins of Monetary Policy Shocks

Conventional strategies to identify monetary policy shocks rest on the implicit assumption that systematic monetary policy is time-invariant. In an environment with time-varying systematic monetary policy, we formally show that these strategies yield shocks that are contaminated, leading to bias in estimated impulse responses. In line with our theoretical results, we empirically show that conventional monetary policy shocks are predictable by measured fluctuations in systematic monetary policy. We propose new shocks that are purged of this predictability. Our preferred new shocks show that U.S. monetary policy affects inflation and output more strongly and faster compared to the corresponding conventional shocks.